Australia exposed at home: OECD

MORE falls in Australian house prices would deal a major blow to household wealth and could stifle consumer spending, the Organisation for Economic Co-operation and Development said.

While house prices have bucked the plunging trend seen overseas, an OECD report published this week outlined the risks of putting large sums of wealth into bricks and mortar.

Amid a debate over whether house prices have bottomed, it named Australia as one of a few countries where people had borrowed heavily against the value of their homes. This occurred through products such as home equity loans or reverse mortgages, promoted by lenders as a convenient line of credit.

"Negative effects of falling house prices on consumption are likely to be larger among those countries where mortgage markets have in the past facilitated housing equity withdrawal and the ratio of housing wealth to disposable income is relatively high," the report said.

In late 2007 Australia's housing wealth was more than three times disposable income, 50 per cent higher than the ratio in the United States.

So far, however, national house prices have fallen moderately.

While US and British prices have plunged up to 20 per cent, official figures show average prices in Australian capital cities dropped 6.7 per cent in the year to March. The research firm Residex said national prices were down just 1.2 per cent in the year to May, because of a recent lift.

Amid brighter economic forecasts from bodies such as OECD, some analysts said prices would keep rising because of short supply. This would buck previous trends identified by the OECD.

"Historical experience across the OECD indicates that the contraction phase of the real house price cycle is typically around five years," the report said.

But an economist at the ANZ Bank, Alex Joiner, said an influx of first-home buyers was likely to push up prices. "There's obviously a risk if house prices fall, but they're not at the moment and we don't expect them to," he said.